Wednesday, February 19, 2014

Risk off: Aussie takes the brunt | FED Bullard and the Baby Boomers

Risk is off this morning after results of another HSBC Purchasing
Managers Index for Chinese manufacturing gave a poor reading. The Aussie dollar
took the brunt of this news, falling sharply overnight (GMT) against the US
dollar.

Now risk is off and there are two conflicting forces at play in the
Forex market. On the one hand there is a demand for safe haven instruments,
which always occurs when risk is off. The Yen and the precious metals,
particularly gold and silver, fulfil this purpose.

However, the minutes of the last FOMC meeting were released last evening
(GMT) and they were unequivocal with regard to the determination of the Committee
members to eliminate Quantitative Easing. There was, apparently, even some
discussion about when interest rates might have to be raised. This is the first
occasion since the onset of the Great Financial Crisis that this has happened.
This should be strongly supportive of the Greenback.

This is illustrated by the battle that is taking place between the Yen,
as a safe haven currency, and the US dollar, in the light of the stance that
the FOMC has apparently taken. See the chart at top.

Later today brings consumer inflation figures and initial jobless claims
from the US,
each of which will undoubtedly have a bearing on all of this.

FED Bullard and the Baby
Boomers

There is some mystery as to why, if the rate of unemployment in the USA is falling,
as it is, the number of new Non-Farm jobs has declined in the last two government
reports on this topic. This seems like a contradiction and can only be
explained by the assertion that more and more people are opting out of the
workforce. In recent weeks it has been represented that these people are so fed-up being rejected for work that they have decided to stop looking.

Now the president of the Federal Reserve Bank of St. Louis, James Bullard, has come up
with a different theory, which we like. This is that the participation rate is
falling, not because of disillusionment on the part of workers, but simply
because great swathes of baby boomers are retiring.

This makes excellent sense. The children of the population explosion that tool place just after World War Two, which provided the masses that made the ‘Sixities so
exciting, and who went on to become the workforce, consumers and ultimate
drivers of the various bubbles we have witnessed before and after the turn of
the last century, are retiring. And this is making the unemployment rate look
good, which is still one of the primary factors in the deliberation of the
Federal Reserve when it comes to monetary policy.